The Real Economics of Holiday Gift Giving

It’s trendy to get your economist on around the holidays and complain about the inefficiency of gift exchange. Giving money is a more efficient way to make the recipient better off. But that’s a fallacy that only trips up poser-economists. To a real economist, that’s like observing that eating an omelette is an inefficient way to get all of the nutrients we need in our breakfast. Yeah, so? That’s not why I ate it.

A real economist recognizes unregulated, voluntary exchange when he sees it. He doesn’t bother inventing some hypothetical motivation for the exchange because he understands revealed preference. If they are doing it voluntarily then it is efficient, regardless of what they think they are getting out of it. Indeed, the pure consumption value of buying a plaid sweater for somebody is a perfectly good motivation. And since the recipient voluntarily accepts the gift, even better. If there was a Pareto superior alternative they would have done that instead.

So this holiday, swat that poser economist in red off your left shoulder, hold hands with the real economist in white on your right shoulder and give to your hearts’ content. (Oh and I am very easy to shop for. Just don’t forget to include a gift receipt!)

8 comments

But real economists do know that voluntary interactions do not imply Pareto-efficiency. Gift giving is part of a larger relationship, and this relationship may well be stuck in an inefficient equilibrium. Think job market signalling.

Also, you are not considering that a big portion of this gift exchanging is due to peer pressure. Sure, you won’t go to jail if you refuse to buy presents for your loved ones, but try to do that for one year.

The fact that the format is still preferred to money giving simply says that people view it as the better (the less evil) alternative, but does not necessarily mean it is optimal. (A more “practical” race, the Chinese, actually prefer to give money on their new Year festival)

Just look at the development of Wedding wishlists. In the past, people would give whatever they see fit to the wedding couples. Now it is a popular practice for wedding couples to “reveal their preferences” by publishing their wishlists. The whole wedding gift giving process has surely become more efficient.

So why not holiday gift exchange? The fact that people are not publishing their Christmas wishlists do not mean it is not a better way to do. Economics tends to view the current state as an optimal equilibrium, this always bothers me.

another commentator also brings up the point of peer pressure. That is, it may be optimal for an individual to give gifts given that everybody else is doing so. But it may well be an aggregate waste for the society to engage in pairwise simultaneous give exchange. i.e. a classical prisoner’s dilemma.

Just look at how many gifts are returned after each holiday season. Do all the inventory, handling, wrapping, shipping, driving, etc. expanses really justify the good feelings these unwanted gifts bring?

A real economist recognizes unregulated, voluntary exchange when he sees it. He doesn’t bother inventing some hypothetical motivation for the exchange because he understands revealed preference. If they are doing it voluntarily then it is efficient, regardless of what they think they are getting out of it.

and i couldn’t help but laugh at this:

The fact that the format is still preferred to money giving simply says that people view it as the better (the less evil) alternative, but does not necessarily mean it is optimal. (A more “practical” race, the Chinese, actually prefer to give money on their new Year festival)… Do all the inventory, handling, wrapping, shipping, driving, etc. expanses really justify the good feelings these unwanted gifts bring?

if i’m following your argument correctly, you’re implying the resources devoted to gift returns are socially sub-optimal, perhaps even wasteful. and if that is the case, i’m certain the same could be said for Chinese new year’s. cash exchange involves going to the bank, withdrawing cash, returning home, exchanging the cash, and then receiving cash in a red envelope. that cash eventually makes its way back to the bank, and involves an additional expenditure of energy, time, etc.

all of that goes away of course, assuming the involved parties dont store any cash at a bank.

as for your last generalization:

Economics tends to view the current state as an optimal equilibrium, this always bothers me.

isn’t it a lot easier to withdraw cash/deposit cash than deal with returning unwanted gifts to each individual store? you don’t even have to deposit the cash. lollercatsanddogs. societal pressure gifts that are given without any real thought or motivation besides societal pressure are inefficient because neither party gets any utility from the exchange (e.g., the bar of soap your mum gave your fifth grade teacher because all the other kids gave presents and it’d be rude to show up empty-handed).